The value of the British pound has weakened against other currencies.
As I write, the pound trades in the 130s against the US dollar. The pound last came close to this week’s lows during 2009 in the depths of the financial crisis. Against the Euro, we last saw this week’s levels for the pound during 2013.
Good news, bad news
A weak pound is a little inconvenient for British citizens, at least in the short term, but it can be great news for British businesses. That’s why I think it could be a good time to invest in FTSE 100 companies, especially those with foreign earnings or those that export abroad.
A weak pound against other currencies could be one of the first positive effects that Brexit causes, and could start the push for the better, more prosperous Britain that many ‘leave’ voters hoped for.
But there are some disadvantages, so let’s cover those first.
Goods imported to Britain will likely become a bit more expensive. Shoppers will notice that with food, clothes and other goods. British businesses that import raw materials will notice a price increase and will probably pass the extra costs to British consumers with the price for their finished goods.
People travelling abroad will get less foreign money to spend for each pound exchanged. The costs of accommodation and travelling will likely rise too.
Why it looks like time to invest
When a country’s currency falls its stock market often rises, and there is good reason for that.
In theory, a weak currency means that the products a firm produces in that country become more competitively priced to buyers in foreign markets. So, right now Britain’s exports could go up and the firms exporting goods abroad could see the increase in sales boosting their profits. If that happens, share prices of the firms with increasing profits will likely go up.
On top of the export advantage, a falling pound can lead to a boost in profits when companies trading internationally, or that have overseas branches, convert their profits back to sterling for the profit and loss account. That’s a likely second share price driver that could arrive quickly, as many FTSE 100 firms have large overseas operations, with more than 60% of the income for the FTSE 100 firms in aggregate originating from overseas.
Where to focus
It follows from this line of argument that British firms with a focus on the UK market could find it hardest with sterling’s recent plummet. If British customers see their disposable income squeezed by rising living costs because imported goods and services cost more, they may spend less on the goods and services sold by British firms. That, in turn, could squeeze profits for UK-focused businesses.
To me, the opportunity today lies in taking advantage of short-term volatility and weaker share prices in the FTSE 100 to buy firms with a large exposure to overseas markets. Having done that, a medium- to long-term holding period looks set to deliver pleasing results as the advantages of weak sterling filter through.
